Tangled Webs

    The Pentagon Proposal
Issue 8.3
Sep 22, 2003



An Indecent Proposal


Earlier this year, the Pentagon proposed creating a public futures market to help predict terrorist attacks. Essentially, participants would have bet on where and in what form the next terrorist attack would occur, and the betting odds would indicate the likelihood of such an attack. In late July, however, the plan came to the attention of the US Senate and was scrapped in a matter of days.

Even after the decision was made, emotions continued to run hot. Opponents blasted the plan as immoral and irrational. Proponents countered that public exchanges, like the stock market itself, are far better at predicting events than even the most gifted individuals.

Of course whether a system works and whether it is a good idea are different questions. Exchange-based systems are, in fact, excellent predictors. Their effectiveness has been proven across a wide array of subjects, economies and cultures. The Pentagon's public terror exchange would have almost certainly helped them predict terrorist attacks.

The system would have worked well, and that's precisely why it was a phenomenally bad idea.

One needs only to think of the daily TV news coverage to realize this. "Today San Francisco jumped 90 points to become the city most likely to be attacked by terrorists." The camera would then switch to a press-appointed "expert" who would explain why San Francisco was in immanent danger. Each week it would be a different city. The Pentagon's exchange would have caused far more terror than terrorists could ever hope to.

Of course, that doesn't mean that all of their hard work should go to waste.



A Modest Proposal


I humbly propose the Exchange-Based Career Advancement Protocol (EBCAP) as a way in which both the Pentagon and corporate America can benefit from such exchanges.

Under EBCAP, all employees receive a certain number of EBCAP dollars each month based on their current salary. They can then use these funds to buy stock in corporate projects they feel confident will succeed. Employees then manage their portfolios; buying and selling shares in projects based on their own evaluations. Like the regular stock market, and employee's trading history is private, but an audit trail is maintained to prevent abuse.

Likewise, before a corporate project can begin and be allocated resources, it goes through an electronic subscription process where employees have the opportunity to buy shares at a fixed pre-IPO price. If enough people subscribe, the project IPOs, and regular trading -- and the project itself -- begins.

The advantages of EBCAP are compelling and four-fold.

First, EBCAP provides immediate and continuous feedback to management as to whether they are making the right decisions. For example, if a proposed project is seriously under-subscribed during its pre-IPO phase, the project does not have the level of buy-in previously assumed.

The movement of a project's stock after assigning a new project manager clearly indicates whether the right decision has been made, and a company-wide market crash when a new CFO is appointed would be an ominous sign indeed.

Second, EBCAP provides an unbiased metric to determine the most effective employees. Rather than relying on quarterly or annual performance reviews, management can examine the price history of the projects to which employees have been assigned. If stock prices tend to increase after assignment, the employee is obviously very valuable.

Third, the return on investment of EBCAP portfolios helps identify those with leadership aptitude. The individuals with the highest returns are those who can best evaluate the value of a project and invest their funds accordingly. Of course, there is more to leadership than just knowing which way the winds blow. Someone who has amassed an EBCAP fortune, but has seen the value of most of his own projects decrease, is probably a master of corporate politics, but would be a poor candidate for advancement.

Fourth, EBCAP encourages deeper employee involvement and participation. To improve their portfolio return, people are motivated to learn more about the company and are more likely to start seeing the big picture.

Some critics of EBCAP claim that employees should be doing their work and not worrying about their portfolios, but such comments are shortsighted. It is neither possible nor desirable for a normal human being to "just do his job" and have no other concerns. A lunchtime walk through any company cafeteria will confirm this.

Far from being a waste of time, EBCAP results in productivity and morale gains as the traditional ill-informed office gossip and politicking are replaced by constructive discussion about which company projects are likely to succeed and why.



Abuse of the Proposal


Some worry about stock price manipulation, but with a large number of participants in the exchange, such abuses are minimal and self-regulating. For example, a CTO could order all of his direct reports to by stock in his new pet project. If his subordinates believed the plan to be a poor one they would be faced with a dilemma. On the one hand, they could buy the stock, but doing so could cause them to loose money and perhaps damage their chances of advancement. On the other hand, they could not buy (or even short) the shares. Since their boss would not know how they chose to invest, it is pretty clear which course of action they would take.

Undoubtedly, a supervisor can help out or harm a subordinate's portfolio performance (and his career) by providing or withholding critical information. The effects of this behavior, however, are far smaller than those of the more common career-advancement politics. Furthermore, managers who engage in this kind of activity at the expense of performance will soon find their own project's share price dropping.

EBCAP would work well, and that's precisely why organizations like the Pentagon would view it as a phenomenally bad idea.

EBCAP provides clear, immediate and clear accountability not only of the rank-and-file, but of the top brass as well. Regardless of potential benefits, very few people are willing to impose this level of transparency and accountability on themselves.

The irony, of course, is that if the Pentagon had enough confidence in exchange-based systems to actually use them to evaluate their own projects, the terror-futures exchange would never have been proposed to the American public.


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© Copyright 2003, Tim Romero, t3@t3.org
This article first appeared in the September 18, 2003 edition of The Japan Times.
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